FHA loans are not just for first-time homebuyers, contrary to popular belief. Anyone that qualifies can reap the benefit of this program. Luckily, the program is known for its flexible guidelines and low down payment rules.
Perhaps one of the most beneficial guidelines, however, is the low FICO score requirements. The FHA only requires borrowers to have a 580 credit score. That is one of the lowest credit score requirements out of any program available today.
What Lenders Require
The 580 credit score requirement is an FHA requirement. Lenders can also have their own say. According to the FHA, borrowers need a 580 credit score if they want to put down just 3.5% on the home. However, the FHA goes on to say that they will accept a credit score as low as 500 if the borrower puts down a minimum 10% down payment.
Lenders, on the other hand, often have a different perspective. Lenders must abide by the FHA’s minimum rules. However, they can have stricter requirements on top of what the FHA requires. In this case, many lenders do not allow a FICO score as low as 580. Many lenders prefer a score a little higher, such as 620 or 640.
Applying With No Credit Score
A unique aspect of the FHA loan is that lenders can approve you for the loan if you don’t have a FICO score. In this case, lenders will need to evaluate non-traditional forms of credit. They’ll ask you for three forms of other types of credit, such as insurance payments, rent, and utility bills. You must provide the lender with proof of timely payments for the last 12 months in order for this method to work in your favor.
Qualifying for the FHA Loan
The FHA requires more than just a 580 credit score. They also require a maximum front-end debt ratio of 31%. This means your principal, interest, taxes, homeowner’s insurance, and mortgage insurance payment cannot take up more than 31% of your gross monthly income.
They also require a maximum 43% debt ratio on the back end. This means all of your debts, including installment loans, revolving credit loans, and your new mortgage payment cannot exceed 43% of your gross monthly income.
You’ll need to prove that you have stable employment and/or income. You’ll also need a decent credit history, aside from the score. If you have a lot of delinquent accounts or collections, it could stand in your way of an FHA approval.
Benefits of the FHA Loan
The FHA loan has its quirks, but it also provides borrowers with many benefits including:
- Flexible guidelines – As we discussed above, you don’t need a high credit score to qualify for the loan. The FHA also has flexible debt ratio guidelines, making it easy for the ‘average person’ to qualify for the loan.
- Low interest rates – This government-backed loan has fairly low interest rates compared to any other program. You generally don’t have to pay points to get the lower rate either.
- Minimal fees – Every mortgage has closing costs and the FHA loan is no exception. However, the fees are often less than those of other programs.
Paying MIP on FHA Loans
The one downside of the FHA loan is the mortgage insurance premium. You’ll pay it upfront and annually. Upfront, you’ll pay 1.75% of the loan amount. If your loan is $100,000, you’d pay $1,750 at the closing. This money goes directly to the FHA. It helps keep the FHA solvent. Without the funds, the FHA would not be able to guarantee their loans. The guarantee is the only reason lenders allow loans with lower credit scores and higher debt ratios.
You’ll also pay MIP on an annual basis. Most borrowers pay 0.85% every year. The lender recalculates what you owe based on your outstanding principal balance. The lender then divides the amount equally among 12 payments. You pay the MIP with your mortgage payment, just like you would pay Private Mortgage Insurance on a conventional loan.
The FHA loan is a flexible loan that many people use to purchase and refinance their home. It’s flexible FICO requirements allow many people to qualify for the loan with little money down or little equity in their home.